Lenovo’s Motorola Mobility pins turnaround hopes on emerging markets

By Eve Fan

A year after being acquired by Lenovo, the Beijing-based technology firm has placed its faith in Motorola Mobility to lead a turnaround in its smartphone division and become profitable in 2016.

The iconic mobile device company that has, in four short years, been spun off from Motorola Inc., acquired by Google Inc. and then sold to Lenovo for nearly $3 billion, faces significant challenges.

According to International Data Corp., Lenovo dropped to fifth place in smartphone market share in China during the second quarter, behind Samsung, Apple, Huawei, and Xiaomi.

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Lenovo’s smartphone market share dropped to 4.7 percent last quarter from 8 percent a year ago. (International Data Corp., Eve Fan/Medill)

The company blamed its weak performance in China to the local consumer preference for buying phones from online vendors rather than from traditional mobile carriers. To react to the softer demand and fierce competition in China’s smartphone market, Lenovo said it will focus on expansion into emerging markets outside of China.

Lenovo CEO Yang Yuanqing expects the shift in strategy to quicken the pace of a mobile turnaround.

“In mobile, [we will] turn the business around in one or two quarters and enter a new era of profitable growth,” Yang said during the company’s Nov. 11 conference call after reporting fiscal second quarter results.

The company took a charge of $923 million in the quarter ended Sept. 30 due to restructuring and integration costs related to the October, 2014 acquisitions of both Motorola Mobility and IBM’s x86 server business.

As a result, Lenovo reported its biggest net loss in more than six years in the quarter. The company’s net loss was $714 million, or 6.43 cents per share, compared with net income of $262 million, or $2.49 cents per share, in the year-ago period.

As part of its restructuring, Lenovo eliminated 10 percent of its global workforce, amounting to 3,200 people. That included 500 job cuts at Motorola Mobility in Chicago that have been completed, according to a spokesman.

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Americas contributed $3.65 million, or more than 30 percent, to Lenovo’s total revenue last quarter. (International Data Corp., Eve Fan/Medill)

Analysts expect continued uncertainty as Lenovo’s strategy plays out. Shares of the company have fallen 22 percent over the past year, closing Wednesday at HK$ 8.32. But the stock has rebounded 38 percent from the 52-week low of HK$ 6.02 set on Sept. 2.

Morningstar senior analyst Dan Baker, who has a buy rating on Lenovo shares, doesn’t expect Motorola to become profitable until fiscal 2017, a longer time frame than the company itself is projecting.

“The benefits of the Motorola Mobility acquisition are yet to shine through in the results as the business is still being integrated,” Baker said in an interview via email.

He added that Motorola’s patents will help the company expand into emerging markets outside of China by lowering the cost of the handsets.

“As of now, earnings visibility is much lowered, but we still believe Lenovo has what it takes to successfully integrate these acquisitions and return to a path of increasing profitability over the next 12 to 18 months.” Alberto Moel, senior research analyst at Sanford C. Bernstein, said in a Nov. 12 research note.

Lenovo holds three other smartphone brands — Vibe, Lemon and Zuk — that it is integrating into Motorola Mobility, which is in charge of the design, development and manufacturing of all smartphones in the mobility unit, according to William Moss, Motorola Mobility spokesman.

Motorola recently released a series of new products, including the second-generation Moto X phone in August and the Moto 360 smart watch the following month.

“The launch of a series of new Motorola models allows Lenovo to grow its smartphone business in other markets with more reasonable competition,” said Moel, who has an “outperform” rating on the shares. “Lenovo expects to see healthy demand from India, Southeast Asia and Eastern Europe markets driven by Motorola smartphones in the coming holiday season.”

Out of 34 analysts surveyed by Bloomberg LP, 21 had a “buy” rating on Lenovo shares, nine rated the shares a “hold,” and four suggested selling the shares.

Lenovo CEO Yang said the company is also planning to “attack aggressively” in the enterprise space following its 2014 acquisition of IBM’s x86 server business.

“In PCs, [we will] achieve 30 percent market share with strong profit. In enterprise, start from $5 billion annual business and attack aggressively,” he said on the company’s November conference call.

In 2005, Lenovo acquired IBM’s ThinkPad laptop and tablet line and remained one of the biggest personal computer manufacturers in the last decade. It still commands the top spot, with an 18.8 percent share of the global market.

“We believe risks are relatively low for Lenovo in the PC market from a market share perspective,” Baker said.

Baker added that the smartphone market share of Lenovo may “undulate dramatically” due to competition brought by cheap smartphone brands such as Xiaomi. “It competes head-on with Lenovo in the mid- to low-end smartphone market, which is likely to be the key segment in emerging markets,” he said.

Photo at top: Motorola Mobility opened its first pop-up shop in downtown Chicago on Nov. 7. (Eve Fan/Medill)